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Guest Article

(From the February 11, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Explains Duty of ERISA Fiduciaries to Collect Delinquent Contributions

Outlining the interrelationship of ERISA §§ 402 through 405, the Department of Labor explained the basis by which a fiduciary is obligated to collect delinquent contributions, even where the fiduciary is a directed trustee not responsible under the trust document for monitoring or collecting contributions. U.S. Department of Labor Field Assistance Bulletin (FAB) No. 2008- 01 (February 1, 2008).

Overview of ERISA Duties

Concerned with the prevalence of trust agreements that purport to relieve financial institutions serving as plan trustees of any responsibility to monitor or collect delinquent contributions, the Department issued guidance outlining the interrelationship among ERISA §§ 402 through 405, and setting forth a step-by-step analysis by which fiduciaries can more clearly identify their duties to collect delinquent contributions. Essentially:

Duty to enforce claims. When an employer fails to make a required contribution, the plan has a claim against the employer and that claim is an asset of the plan. /1/ A fundamental duty of a trustee is to enforce valid claims held by the trust.
Duty to act prudently. ERISA § 404(a) requires fiduciaries to discharge their duties prudently and solely in the interest of the participants and beneficiaries. The steps necessary to discharge a duty to collect delinquent contributions will depend on the facts. According to the FAB:
In determining what collection actions to take, a fiduciary should weigh the value of the plan assets involved, the likelihood of a successful recovery, and the expenses to be incurred. Among other factors, the fiduciary may take into account the employer's solvency in deciding whether to expend plan assets to pursue a claim. /2/
Written documents must name at least one fiduciary. ERISA § 402(a) requires that a plan be established pursuant to a written document which identifies "one or more named fiduciaries" who will manage the plan.
Trustee must hold assets. ERISA § 403(a) requires plan assets to be held in trust by one or more trustees. The trustees must either be named in the written documents or be appointed by a named fiduciary.
Trustees are always fiduciaries. The trustee has the exclusive authority to manage and control the assets of the plan. /3/ According to the FAB:
A plan trustee, therefore, will, by definition, always be a 'fiduciary' under ERISA as a result of its authority or control over plan assets and, accordingly, is required to discharge its trustee responsibilities prudently and solely in the interest of the plan's participants and beneficiaries. [Emphasis added.]
Trustee responsibilities can be allocated. If plan assets are held by two or more trustees, the trustees are deemed to jointly manage and control the assets. However, ERISA § 405(b)(1)(B) allows specific responsibilities to be allocated among the trustees, if done pursuant to an agreement authorized by the trust document. In this case, a trustee to whom the responsibilities are not allocated will generally not be liable for the failure of another trustee to perform the responsibilities that are allocated to that trustee. Similarly, where plan assets are held in more than one trust, a trustee is only responsible for the trust for which it is trustee.
Duty to collect delinquent contributions must be assigned. In accordance with the statutory framework described above, the duty to collect delinquent contributions must be assigned to:
- A discretionary trustee
- A directed trustee, or
- An investment manager.
According to the Department:
[I]f no trustee or investment manager has this responsibility, the fiduciary with the authority to hire the trustees may be liable for plan losses due to a failure to collect contributions because the fiduciary failed to specifically allocate this responsibility. /4/

The allocation of trustee responsibilities is evaluated on all the facts. If the trust agreement is ambiguous it should be interpreted consistent with ERISA's statutory scheme rather than in a manner that relieves all trustees and investment managers from responsibility. Also, if a directed trustee routinely assumes discretionary responsibility, the trustee should not seek to limit its liability by claiming that it is a directed trustee.
Duty to remedy breach by co-fiduciary. As explained by the Department, even if a particular trustee is not responsible for collecting delinquent contributions:
the trustee (including a directed trustee) nonetheless would have an obligation under sections 404 and 405(a) to take appropriate steps to remedy a situation where the trustee knows that no party has assumed responsibility for the collecting and monitoring of contributions and that delinquent contributions are going uncollected.

ERISA § 404, as discussed above, imposes the duty to act prudently and solely in the interest of the plan participants and beneficiaries. In the case of delinquent contributions, it would require appropriate action of a trustee who is not otherwise responsible for their collection.
Moreover, ERISA § 405(a) imposes liability on a fiduciary for another fiduciary's breach if the fiduciary:
- Knowingly participates in the breach,
- Enables the other fiduciary to commit the breach, or
- Has knowledge of the breach and fails to take reasonable efforts to remedy it.

Therefore, even if a trustee is not responsible for collecting delinquent contributions, if it knows (or, arguably, should have known) that the responsible fiduciary failed to collect, it would have an obligation to take appropriate action to correct that breach.

Appropriate efforts to correct the breach will depend on the circumstances, and would include advising the named fiduciary or Department of Labor of the breach, reporting the breach to other fiduciaries, taking actions to enforce the contribution, seeking an amendment of the plan, or seeking a court order mandating allocation of the duty to collect the contributions.

Observations

Clearly, the Department is concerned with financial institutions attempting to limit their ERISA obligations by drafting trust agreements to provide that they have no obligation to monitor or collect contributions. The guidance makes clear that the duties long imposed under ERISA's fiduciary framework are not abrogated by those attempts -- that all trustees (even directed trustees) are fiduciaries who are obligated to satisfy the prudence and exclusive purpose requirements of ERISA § 404(a), and that a fiduciary is liable for the breach of a co-fiduciary under ERISA § 405(a) if it knows of a breach by that fiduciary but fails to take action to remedy it.

The Department observed that the obligation to collect delinquent contributions must rest with either a discretionary trustee, a directed trustee subject to the proper direction of a named fiduciary, or an investment manager -- and that the failure to properly assign the responsibility may cause the fiduciary responsible for the appointment to be liable for plan losses resulting from the failure to collect. Where the appointing fiduciary is the employer, this may have little impact since the employer is presumably already liable for the delinquent contributions. However, where the fiduciary is a committee of individuals or a particular officer of the employer, note should be taken to confirm that the duty to monitor and collect contributions has been properly allocated and does not rest with the appointing fiduciary out of oversight.

The FAB is available on the Department of Labor's Web site at www.dol.gov/ebsa/regs/fab2008-1.html.

/1/ Participant contributions that are withheld from wages become plan assets on the earliest date that the amounts can reasonably be segregated from the employer's general assets. With respect to retirement plans (e.g., 401(k) contributions and after-tax contributions), this date can not be later than the 15th business day of the month following the month the contribution was withheld from wages.

/2/ According to the Department, if the plan is not making "systematic, reasonable and diligent efforts" to collect delinquent employer contributions, the failure may be deemed to be a prohibited transaction under ERISA. Therefore, it is essential for fiduciaries to carefully determine what collection actions are appropriate, since failure to take appropriate action could result in the fiduciary's relationship with the plan (e.g., the fiduciary's receipt of fees for serving as the plan's trustee) being considered a prohibited transaction.

/3/ There are two exceptions to the general rule that a trustee has the exclusive authority and control over the assets. The first exception is where the trustee is subject to the proper direction of a named fiduciary (i.e., is a "directed trustee"). Although the scope of duties assigned to a directed trustee is narrower than those normally ascribed to a discretionary trustee, a directed trustee is nonetheless a fiduciary and is subject to ERISA's fiduciary rules. The second exception is where an investment manager is appointed under ERISA § 402(c)(3). In this case the investment manager and not the trustee is responsible for the management of the assets assigned. Despite the appointment of an investment manager, the trustee remains a fiduciary, however.

/4/ However, in many cases, the fiduciary with the authority to hire the trustees is the employer itself. In the case of late contributions, this entity would already be liable to the plan for losses caused by the delay.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

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